Raymond James Complete 5 page Memo
Received the Raymond James Memo
Ed Mills
Alex Anderson, Res. Assoc.
JUNE 6, 2019 | 12:01 AM EDT
Current State of Housing Finance Reform
Mark Calabria beginning his tenure as Federal Housing Finance Agency (FHFA) Director, a White House-directed effort for the Treasury Department
and HUD to draft reform recommendations, and Congressional efforts at legislative reforms are three key factors currently elevating the
uncertainty of the future of housing finance reform. Director Calabria has been vocal about his desire to reform, and a timeline for the potential
"recap and release" of Fannie Mae and Freddie Mac (the GSEs) is coming into focus. We expect the finalization of a GSE capital rule, reworking of
the GSE’s preferred stock purchasing agreement (PSPA), adjustments to the qualified mortgage (QM) patch, and determinations on a potential
commitment fee as the necessary first steps before a GSE capital raise could be undertaken. The results of the 2020 elections could add some
friction to the process. Near-term we believe Director Calabria (whose term last until 2024) will take actions that limit overall harm to the housing
market, but that calculation would need reassessment should President Trump fail to win reelection.
Potential GSE IPO at least 3-4 years away. There has been speculation based on Director Calabria’s comments that regulators could move to
position the GSEs for an IPO to raise capital sometime in 2020, but an extensive list of preparatory steps likely prolongs the timeline to somewhere
in the range of 3-4 years, if it were to occur. A guiding principal of Calabria’s is that GSE conservatorship has to end, but the GSEs will need to
build up sufficient capital in the lead up. Under the proposed capital standards, the entities will need to build around $200-250 billion in capital
reserves. A possible sequence of events leading up to an IPO could see the finalization of the GSE capital standards and adjustments to the net
worth sweep to allow for more capital retention. Secondary priorities would address the QM patch and a possible commitment fee determination.
There will likely need to be a couple years of an established earnings history under the new capital rule and other additional constraints before
an IPO can be appropriately considered for additional capital.
More questions than answers? Other questions that likely need to be answered before an IPO or an end to their conservatorship, include the
future of the multifamily businesses of the GSEs, potential changes to underwriting standards, debates over the amount credit risk transferred
required, ability to charter additional entities, the implementation and potential impact on the new uniform mortgage backed security UMBS,
and how any implicit or explicit government backing would work. The FHFA director does not have the ability to establish a government backing,
but Director Calabria has suggested using the commitment fee tied to the Treasury line of credit as an interim step.
Scope of Treasury and HUD recommendations still being determined. Treasury and HUD are working on separate recommendations, and
the effort has yet to determine whether a final product will be a high-level guideline-setting document, or if the agencies will move forward
with specific administrative and legislative action recommendations. Once the agencies finalize their contributions, the White House’s National
Economic Council will review and streamline the recommendations on the way to releasing a final report. A key figure in the effort, Treasury
Counselor Craig Phillips, is due to department the administration – adding some uncertainty to the final contents and execution. We do believe
it is important to have input from both Treasury (which will be focused on the GSEs) and HUD (which will focus on FHA) as policy changes for one
can cause significant market share shifts between various entities.
Move on QM patch faces January 2021 deadline. The patch is set to expire January 1, 2021, setting up the next year and a half as the remaining
timeline for Calabria to take action. Calabria has suggested opening up the patch to the rest of the market in order to have similar rules for
all market participants. 30% of the GSE’s business is currently under the patch’s allowed debt-to-income ratio above 43%, putting a significant
Please read domestic and foreign disclosure/risk information beginning on page 3 and Analyst Certification on page 3.
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amount of business for the GSEs at potential risk. We expect Director Calabria to find a middle ground here, but it could come with further
restrictions on new originations of riskier loans.
Political considerations. We continue to believe that Calabria will seek to work with Congress on reforms, especially given his background as a
former Senate Banking Committee staffer, but he will not let Congressional inaction stop him from taking executive action. A likely motivating
factor for Calabria pushing reform efforts quickly into his tenure is to spur Congress to hasten its legislative efforts. However, the 2020 election
results could add friction that elevates uncertainty on reforms if Democrats win the White House/make gains in Congress. Regardless of the
election results, Calabria’s 5-year term will keep him at the forefront of the housing finance reform effort until 2024 – well into the next Presidential
term.
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RJA RJL RJA RJL
Strong Buy and Outperform (Buy)
Market Perform (Hold)
Underperform (Sell)
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4% 3%
20% 24%
10% 10%
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